Authored article by Mr. Rajiv Janjanam, Vice President & Portfolio Head, SME & Retail Lending, Capri Global Capital Ltd. on ET Online

July 05, 2014

Budget 2014: Thrust on infra may benefit SMEs

With thumping victory for the NDA Government, expectations are high on how they will present an adjustment to the former government's budget and execute and implement its own strategy. The hype around the governments mantra of 'minimum government and maximum governance' already announcing few measures to change the mode of governance will be proved if we see some surprise measures in the Budget.

These issues would have to be taken into account while making the budget. From various quarters there seems to be a view that growth this year would be between 5-6 per cent, making it a more realistic budget on the anvil to reduce the gross borrowings for year.

There are currently two major concerns for the economy today that have emerged in recent times. The probability of a sub-normal monsoon coupled with elevated crude oil prices on account of the crisis in Iraq. We need a robust fiscal policy to support growth and monetary policy going ahead. Global as well as the domestic investors would also be looking for signals.

The government has already increased railways tariffs which are an indication that the government would be walking the path of fiscal prudence. They are most likely to link any benefit to be given with a return in terms of fulfilment of economic objective.

It would be worthwhile to note that provisioning of food subsidy and the implementation of the 7th Pay Commission would be the two major road blocks towards attainment of fiscal deficit target going ahead. And given that growth is expected to slowly recover at a modest pace during the year, there would not be a significant revenue augmentation. However, if they announce any specific measures which would either lead to broadening of the tax base or increase in tax compliance, a modest increase in revenue cannot be ruled out.

Some key objectives the budget would try to address should be:

1) To invoke measures to revive GDP growth.

2) To focus on increasing infrastructure investment which can provide a big push to the economy

3) To take stance on subsidies and hence indicate policy relating to fuel pricing.

4) To strike a balance between fiscal consolidation & public spending while maintaining sustainable inclusive growth.

5) Moving towards implementation of GST and DTC

6) Resurrection of financial savings such as Deduction of Interest on home loans which will provide a boost to the home loan sector as well as housing industry, and deduction under section 80C may be revised at a higher level to channel savings into financial instruments.

7) Measures to revive financial savings which have been declining in the last couple of years and also getting reflected in pressure on CAD.

8) The Budget will be looking at better targeting of the existing subsidy bill.

Budget Expectations for MSMEs:

1) The new government does clearly recognize that high inflation is essentially due to supply-side constraints in terms of inadequate infrastructure. With this in the back of their mind, the Budget will be expected to set a roadmap for the infrastructure sector in particular. There are innumerable number of MSMEs serving the Infrastructure Sector and are expected to be benefited by this. Coal, power with special focus on nuclear power as well new and renewable energy, transport and information technology besides urbanization is expected to receive a boost in the upcoming budget

2) Linked to the subject around infrastructure, is the need to look at NBFCs, especially the Asset Finance Companies and Infrastructure Finance Companies. Within the infrastructure financing plethora, these companies play a very critical role in addressing the credit needs of numerous MSMEs that provide crucial support services in infrastructure projects and but continue to remain outside the purview of institutional funding channels. In case there would be announcement of measures that could enable NBFCs to easily mobilize resources from various sources, both domestic and foreign, it would play a great role in reviving the sector.

3) Cost and access to bank credit and markets, besides red-tape, labour and taxation remain the main challenges faced by the MSMEs in the country. While export opportunities are expected to open up for Indian companies with the expected revival in the global economy, SMEs are doubtful about exploiting these opportunities in the absence of a platform to showcase their capabilities and tap the potential overseas customers.

4) Greater support from the Government is expected in boosting exports, in the form of a marketing platform to identify potential buyers.

5) With the imminence of a sub-normal monsoon there will be pressure on the Budget to make provisions for relief for farmers. There can be a switch between accounts of allocations for bank capitalization with disinvestment to free resources for interest subvention or loan waivers for farm loans.

6) The sector also expect a dedicated MSME bank to go a long way in solving their basic credit related challenges, particularly for raising credit without collateral.

The least we can expect from the government is outlining a clear strategy and also stating its execution plans as it is the implementation that holds the key to success. 

(Rajiv Janjanam is Vice President and Portfolio Head, SME & Retail Lending, Capri Global Capital Ltd.)

Views of Mr. Sunil Kapoor, Executive Director, Capri Global on Zee Business on 19th June, 2014

Authored article by Rajiv Janjanam, Vice President and Portfolio Head, SME & Retail Lending, Capri Global Capital Ltd.

What financiers do when funding an SME, and what they can do better

The micro, small and medium enterprises (MSMEs) are the backbone of economic development in any country and more so in India as we have a huge population to be served. They are the incubators for talent, innovation and entrepreneurial spirit, which is key to a country's development.

The Indian small & medium enterprises (SMEs) sector is considered as the backbone of the economy, contributing 45 per cent of the industrial output, 40 per cent of the country's total exports, employing 60 million people, creating 1.3 million jobs every year and producing more than 8,000 quality products for the domestic and international markets.

With approximately 30 million SMEs in India, around 12 million people are expected to join the workforce in the next 3 years with the sector growing at a rate of 8 per cent a year. Efficiently organized and innovative, MSMEs often exercise frugal management skills and use local resources to create innovative products and services which cater to any country's growing needs. However, in order to continue scaling up, timely and adequate access to financial services is an imperative, and this has been traditionally one of the biggest hurdles.

Funding Gap in MSMEs

For SMEs, obtaining and securing the right source of finance is a major challenge. Lack of available funding for SMEs has been brought into sharper focus post-credit crunch.

The total gap in MSME funding is estimated to be around $126 billion. Out of this, the debt gap is approximately $84 billion and equity gap is about $42 billion, while the total equity supply is only around $526 million. Many growth businesses are started by entrepreneurs, often with little experience of how to raise finance to fund his/her growth.

The major reasons for creation of this gap are information asymmetry which exists in Indian SMEs, the family-owned nature of Indian businesses, and lack of information regarding tapping the right kind and source of finance.

Funding Structure

Traditionally, private funds from friends and family form the single largest source of finance to MSMEs in India. MSMEs in India also rely heavily on private money lenders and the unorganized financial sector for their requirements, where the terms of financing are unclear and interest rates are high.

Banks have been making steady strides in order to bridge this gap. However, the approach followed by banks to funding is very restrictive as the bank has to create value by controlling and managing risk.

In any loan application for a business, a bank has to necessarily evaluate the risks involved, gauge collateral support and the methods to mitigate those risks. Therefore, it is not always possible for an entrepreneur to satisfy all requirements and conditions which the bank might pose. The above methods of financing are majorly debt financing, and sources of equity funding remain elusive in India.

Government Initiatives in MSME Funding

The government has always been cognizant of the funding gap which plagues Indian SMEs. In the 2012-13 Budget, the government announced an India Opportunity Fund of $878 million to support Indian SMEs. This entire amount will be routed to SIDBI and is divided into specific targeted sectors, which include:

Domestic MSMEs >> Internationalization of SMEs >> Sector Specific Funds -ICE, Traditional Sectors, Defense, Infrastructure >> IPO on SME Exchanges

Such initiatives would go a long way in bridging the financing gap and ensuring that India gets a steady flow of entrepreneurs in various fields.

Some simple guidelines to funding SMEs

It is imperative for the financing company to understand the needs of the MSMEs and the capability of them to repay the loans they take.

>> Very rarely does the intention issue come up with the MSMEs. They are the first generation entrepreneurs from each of their families and do not leave any stone unturned to make their venture a success.

>> MSMEs do not have the wherewithal or the money to develop much needed finance team within their organization and end up hiring on a part time basis a small time chartered accountant to look into their accounts. While this suffices their need, however, when it comes to borrowing from large financial institutions, NBFCs or private equity investors fall short of creating the necessary documentation. For a financing company this can perhaps be overcome by watching the SME at work in their offices or unit, gauging if their operations are genuine and then helping them raise their financial reporting standards.

>> Asking key questions and judging the mentality/attitude of the MSMEs and the passion will tell more than looking for non-existent financial documents. A lifestyle of MSE promoter/partners/teams tells a lot about their future.

>> These micro and small enterprises serve much larger enterprises in their processes through job works / parts manufacturing, process outsourcing, supply chain etc. Strength of the principle plays a vital role. For example, a micro enterprise that manufacturers nuts and bolts for Maruti Suzuki largely draws its past, present and future performance from the performance of Maruti Suzuki as a company. During the boom phase, almost all of the suppliers/small time manufacturers of parts grew at a rapid pace and expanded. Some even ventured to cater to different industries rather than be defined by auto industry.

>> Another key aspect which almost every financier observes these days is their performance on loans/lines taken in the past. Key to this is Credit Information Bureau of India Ltd (CIBIL). A lot of information is derived out of the CIBIL report and plays a key role in assessing future performance on loans given to MSEs.

>> With specific mention to the micro enterprises, there exists one other key issue which is the way they operate. For example, businesses typically run by a family with father as the proprietor and children being inducted into business subsequently. Presence of business / legal existence proof also comes up as a hindrance. In some cases, simple rules like submitting your Know Your Customer (KYC) form requiring at least two proofs are not met as these customers fall short as they usually hold only IT returns. We do need to understand these aspects and help in generating another proof. A simple way could be assisting in installation of a landline at customer's office whose bill would suffice as a second proof.

It goes a long way in understanding these customers and the challenges they face to able to fund them with right products at the right time and help them grow. Be with them on the ground and see what they see, it is that very easy to assist them. After all they are the priority sector, and we carry the responsibility to bring in the financial inclusion.

(The author is Vice President and Portfolio Head, SME & Retail Lending, Capri Global Capital Ltd).